Albert Edwards at Societe Generale says January 2008 is here again! UK and US household debt excess comes full circle.

From Albert Edwards Via Email

Very recent data confirms slumping household saving ratios in both the US and UK. This was last seen in 2007, just before the bursting debt bubble blew the global economy and financial system to smithereens. The Fed and BoE should surely hang their heads in shame having presided over yet another impending disaster. Why will politicians and the people tolerate this incompetence? Indeed they won’t.

The US has just this week seen substantial downward revisions to its household saving ratio (SR). Some 1½% has been lopped off recent estimates, taking the SR down from a respectable 5½% to just 3.8% – levels seen just before the last recession. The UK has also recently published some shockingly low household SR data, showing a slump in Q1 to only 1.9%. Actually, the UK’s situation is worse than it looks relative to the US SR if you measure it on the same basis. The US measures household income and savings net of depreciation mainly of the housing stock. If you add this back (as the UK does), the US household gross SR is some 3% higher.

At 7%, the US gross SR looks positively Germanic for its high level compared to the UK! But it is still disturbingly low relative to US history. In addition, the sharp 2% decline over the last year has helped to sustain what has only been moderate consumer spending and GDP growth at a time when real wages have been squeezed.

The UK has also only sustained moderate GDP growth via a total collapse in the SR to unprecedented historical lows, but also relative to the levels of the credit crazy US. The BoE recently warned of a spiral of complacency about mounting consumer debt. But, of course, there is no acknowledgment of its own pernicious role in this unfolding disaster.

The US Bureau of Economic Analysis has this week undertaken some revisions of the US saving ratio (SR). Actually, it has revised both income (downward) and expenditure (upward). And as the SR is the difference between these two very large numbers, it can be severely affected by small changes in income or spending. The new data shows the US SR actually declined from 6% to 4% through 2016 (see chart below) and undoubtedly stopped the US economy sliding into recession in the second half of last year as real household incomes suffered a severe squeeze due to rising headline CPI inflation.

The Fed has had its way. QE has not only inflated corporate debt to grotesque levels, but finally the US SR has responded to the surge in household paper wealth that QE has produced. Typically the SR declines with rising wealth.

Why do you need to bother saving if interest rates are close to zero and house and stock prices are rising?

Wealth Effect

GDP averaged a mere 2% during the recovery, and it is taking ever-increasing amounts of debt to achieve that.